Knowledge Inputs, Legal Institutions and Firm Structure: Towards a Knowledge-Based Theory of the Firm

Article excerpt

Introduction ....................1124

I. Theory of the Firm .................... 1129

A. Traditional Theories of the Firm .................... 1 129

B. The Knowledge-Based Theory of the Firm .................... 1138

II. A Knowledge Taxonomy .................... 1140

A. The Location of Productive Knowledge (K^sub p^, K^sub 0^, K) .................... 1 140

B. Tacit Versus Standardized Knowledge .................... 1144

C. The Dynamics of Productive Knowledge .................... 1145

III. LAWANDKNOWLEDGEMANAGEMENT .................... 1148

A. The Co-Evolution of Intellectual Property Rules and Firm Organization 1150

B. Legal Rules and the Type of Knowledge They Bind.................... 1 159

IV. KNOWLEDGE ALLOCATIONANDTRANSACTIONCOSTS .................... 1162

A. Efficient Knowledge Allocation.................... 1162

B. Knowledge Hazards.................... 1168

V. REVISITING SOME ASPECTS OF FIRM ORGANIZATION FROM THE KNOWLEDGE RESOURCES PERSPECTIVE.................... 1170

A. Correlating Knowledge Structures and Governance (Decisional/Ownership) Structures.................... 1170

B. The Sole Proprietorship or Small Partnership.................... 1173

C. Mass Production Firms.................... 1 173

D. High-Tech Engineering.................... 1183

E. Law Firms.................... 1192

F. The Implications of Knowledge Transfer for the Choice of Business Transactions.................... 1201

CONCLUSION.................... 1204

"An explanation of when, why, and how managerial hierarchies developed in certain industries and rarely appeared in others remains a challenge to econo- mists, sociologists, practitioners of management science, and economic and business historians. "

- Alfred Chandler & Herman Daems, Managerial Hierarchies: Comparative Perspectives[dagger]

"Considering the acknowledged importance of knowledge and competence in business strategy and indeed the entire system of contemporary human society, it is striking that there seems to be a paucity of language useful for discussing the subject .... [T]here seems to be a serious dearth of appropriate terminol- ogy and conceptual schemes. "

- Sidney G. Winter, Knowledge and Competence As Strategic Assets[double dagger]

INTRODUCTION

The literature on the theory of the firm and corporate organization has treated extensively different variables that affect firm boundaries and inter- nal corporate structure. Economists and corporate law scholars have thus accounted for changes in firm structure with explanations based on transaction costs,1 agency costs,2 and property rights over physical assets.3

This literature, however, has largely ignored one very important variable: knowledge resources that firms use in the production process. This variable concerns perhaps the core ingredient firms rely upon to achieve their objective of generating products and services that will be sold on the market. Indeed, knowledge resources are tantamount to the whole business enterprise. However, a theory that focuses on how firms deploy knowledge resources in the production process, and on how that deployment, in turn, has differential effects on firm internal organization is absent in traditional economic explanations and in the legal literature.

This Article begins to fill the gap. We argue that one cannot explain the organization of business firms without reference to the knowledge structure of the firm, because a firm 's internal governance structure is influenced by the type of knowledge required by its production process.

Economists and management scholars have increasingly pointed to the special nature of knowledge resources as an explanation for firm boundaries.4 According to this view, knowledge resources can explain both why firms exist, and why firms develop a particular internal structure. …